By Philip Clarkson, Director of Business Rates
The influential Treasury Select Committee (TSC) has issued a scathing report on business rates in which it asks why the government has allowed the growth in business rates to outpace inflation since the property tax was first introduced in 1990.
The committee also wants to know why, at a time when other corporate taxes are falling, the UK tax take from business rates is one of the highest property tax takes in the OECD.
A guide to reliefs
The committee highlights the number of reliefs required to make business rates work, each one of which adds an additional layer of bureaucracy to an already complex system. It wants the Government to work with local authorities to create a single comprehensive guide on how business rate reliefs are operated by the individual authorities.
It wants the transitional relief system redesigned as it recognises the current system “has kept rate bills artificially high over a prolonged period for many businesses”.
The current approach to business rates acts as an immediate significant disincentive to investment, the report says, and undermines wider government policies, such as reducing carbon emissions through investment in greener technologies or improving productivity.
Redefining plant and machinery
The whole system needs radical reform to make it fit for purpose in the 21st century. Classes of plant and machinery included in many business rates valuations were last re-defined in 1993, when the UK economy worked along very different lines. “Many modern businesses have moved away from being dependent on plant and machinery. It is therefore unfair on the manufacturing sector for their business rates valuation to include their essential operating equipment, where other businesses are not equally affected.”
Flexible valuation methodology
Valuation methodology needs to be more flexible so that it can reflect changing business models, the report says. At the moment, the system seems to permit significant discrepancies to exist in the valuations of seemingly similar businesses.
“The Valuation Office Agency (VOA) must ensure that it is open-minded and prepared to revisit the traditional way that it values businesses to ensure that they take account of real-life modern business experience. We recommend that internal guidelines are reviewed to ensure staff take a flexible and responsive approach to valuation”.
Unsatisfactory appeals system
It finds the current appeal system known as “Check/Challenge/Appeal” (CCA) is unsatisfactory and finds statutory response times too generous. It wants the government to reduce the statutory limit for Checks and Challenges to be reduced to a maximum of six months. It wants the VOA to be more transparent in processing appeals – another bugbear for businesses.
“It is unacceptable to bring in a system that creates so many difficulties for ratepayers. The Check Challenge Appeal process should have been designed so that at its initial implementation in April 2017 it had more functionality than the system it was replacing. In particular, it should have been possible for businesses with multiple properties to authorise an agent to work on their behalf, as firms were able to do previously.”
It has noticed that “there continues to be a disconnect between how the VOA and users of the CCA system view its ease of use and complexity”.
The increased demands on the VOA are recognised in the report which says that it “needs to ensure that it is properly staffed to deliver its specialist role” It states that the VOA “must perform a detailed analysis of its staffing and skills requirement in time for the next Spending Review and share it with the Committee”
The business rates system may be “broken” and is clearly in urgent need of reform, but the problem is what to replace it with? The Committee has considered and rejected a number of alternatives, including the possibility of a land-based tax which it found “theoretically appealing” since it charges landowners rather than tenants, but decided the practicalities of implementation would be too difficult.
In any case, developing and evaluating detailed proposals should not be left to external stakeholders, the committee said. “Given the changing nature of the economy, and with high streets on the decline, the government needs to be curious, proactive and creative in exploring alternative options to such an important source of government revenue”.
The committee concluded by recommending that the government prepares a consultation in time for the next Spring Statement to identify potential alternatives to the current system. The potential solution, it added, should be quick and easy to implement and above all, it should be fair.
All advisers to business ratepayers will welcome this report and will hope some of its content will be reflected in party manifestos in the run up to the December election. Its contents set out a challenge to all parties and candidates as they vie to be the next government and in the next parliament.
For more information regarding the review or to discuss your business rates liabilities in more detail, please get in touch.